Fitch: Record Construction Rate Hangs Over Ontario Housing Market

Beneath the unprecedented boom in the Ontario housing market is a large overhang of pending supply that could threaten continued home price growth in the province, according to Fitch Ratings.

More than 80,000 new multifamily units are currently under construction in Ontario, with the vast majority of this concentrated in Toronto. This is a record high and nearly 50% more than four years ago when the condominium construction boom began. Amid this unprecedented increase in large developments, construction timelines are being extended, with completions lagging behind housing starts. With price levels relatively flat over the last six months, the significant boost to supply implied by this construction overhang could present a problem for continued price growth, with the market potentially becoming oversaturated.

Surprisingly, housing starts in Ontario have actually fallen, with the current rate nearly 40% below the 2012 peak. But with 84% of units under construction in larger multi-family buildings with longer building schedules, compared to an average of 51% since 2000, active construction volumes have continued to grow.

Fitch views Ontario home prices as approximately 25% overvalued based on analysis from its Sustainable Home Price model. This analysis relies on an approach which observes the long-term relationship between home prices and fundamental economic factors such as income, unemployment, and mortgage rates. The model is intended to be a point-in-time estimation of overvaluation, and this estimation is not a projection that prices will fall by this amount. Throughout Canada, Fitch sees prices as overvalued but unlikely to fall. This is due to a number of positive factors, including limited risk in outstanding mortgage products.

Nonetheless, elevated price risk poses concerns, especially with a significant amount of inventory poised to hit the market. As a large number of units come on line, prices may soften, which could reverberate throughout the Canadian economy. Lower prices would reduce the incentives to build further units, which could hit employment in the construction sector that has been buoyed by continuing price growth. This in turn could lead to more significant downside exposure. Since the beginning on 2009, home prices have grown at an annualized rate of 7.6%.